When considering reorder point vs. safety stock, you’re taking into account two related inventory calculations. Both are essential pieces of the inventory planning puzzle, but safety stock is one of three parts of the formula for figuring out the ideal reorder point.
Understanding Reorder Points (ROP)
A reorder point, or ROP, indicates the number of remaining stock units at which a new order of a specific product should be placed. ROP is a key element of replenishment planning, which involves every part of the process for replacing stock.
Understanding your reorder points is imperative because they prevent you from both stockouts and extra inventory. When you reorder a product at the correct time, you replace the product as it sells without requiring additional warehouse space.
Your ROP for every product isn’t a static number. Reorder points change based on demand and your purchase and sales processes. If your product suddenly grows in popularity, or your supplier’s delivery time suddenly takes longer, the ROP can completely change and throw your careful planning off track.
How to Calculate Reorder Point
To calculate your ROP, you’ll need to use the ROP formula:
ROP = (average daily unit sales) x (lead time + safety stock)
Dive deeper into each component so you can calculate your own ROP.
- Average daily unit sales: To calculate averages for daily unit sales, you’ll need to compare multiple periods of data. For example, if you were to consider three months’ worth of sales, perhaps you sold 70 products one month, 60 the next month, and 50 the final month, for a total of 180 products. Divide the total by the three months (or 90 days) and you’ll get an average of two products sold per day.
- Lead time: You’ll also want to consider multiple data points for lead time. For example, maybe your supplier took seven days of lead time to deliver products in one month, five days in the next month, and three days in the month after that. In this scenario, add all three numbers to get 15, then divide by the number of months considered (three) to get an average of five days of lead time.
- Safety stock: To calculate safety stock, you’ll need to use one of the methods discussed below.
Now that we have two out of three variables defined for the reorder point formula, let’s learn more about safety stock to fill in the third.
What Is Safety Stock?
Before moving forward, we have to explore the question: What is safety stock? Safety stock is simply another tool in companies’ arsenals for combating stockouts or overstock. When the unexpected occurs, safety stock is the additional inventory of a specific product that helps fill gaps while you reorder.
Complicating inventory management further, the ideal amount of safety stock can also swing depending on market trends or supply chain disruptions. Accurate demand forecasting can help you predict these shifts in advance so you can alter your strategies to accommodate these changes.
Safety Stock Calculation
The correct amount of safety stock to keep on hand is much more complicated to pinpoint than the ROP, since there are several accepted methods for reaching a solution. On a basic level, the 50% rule means you should keep extra inventory for around half a product’s average lead demand time. This formula calls for multiplying average daily product sales by average lead time and dividing it by two. While that method is simple enough, it often is not specific enough to find optimal safety stock levels.
Other options include the variable demand, dependent demand, and dependent lead time safety stock formulas [https://gainsystems.com/what-is-safety-stock/]. The first two of these use a variable called “Z,” which is a score you determine using a normal distribution chart:
- Variable demand formula: Use for products that experience demand swings. In the formula, you multiply Z by the standard deviation of demand (or how many units demand typically deviates from its average) and the square root of the standard lead time.
- Dependent demand formula: Use for products where demand depends on demand for other related products. For those products, multiply Z by the standard deviation of demand during the lead time, then add the average demand during the lead time to find the ideal safety stock level.
- Dependent lead time formula: Use for products that have lead times that depend on the completion of another product or material first. The calculation involves multiplying the maximum daily demand and maximum lead time, then subtracting from that number the multiplied average daily demand and average lead time.
The Key Differences: Reorder Point vs. Safety Stock
Reorder point and safety stock both contribute to optimized inventory management practices. However, the two are separate calculations to find the perfect numbers for inventory-related scenarios.
Do You Need Both? When & Why
To have effective inventory management, you must use both safety stock and reorder points. Safety stock helps you plan for increased demand so you don’t run out of product. On the other hand, reorder points help you balance between ordering products too soon or too late to fulfill demand. When you’re trying to achieve inventory optimization, both play an essential role in helping you reach your goals of having the right type and amount of inventory in the right places at the right times.
Common Pitfalls & How to Avoid Them
Customer demand can change suddenly. If your demand forecasting isn’t accurate, you can miss the signs that help you plan safety stock and reorder points for impending shifts in demand. Supply chain challenges also pose a problem in your inventory planning. Making sure you’re notified of potential issues as soon as they happen can help you find solutions faster. Both problems can be solved with the help of the right inventory management software.
Optimizing ROP and Safety Stock with GAINS
At GAINS, our top-of-the-line inventory management software enhances your operational efficiency by accurately forecasting demand and incorporating it into all your planning. Achieve optimal safety stock levels and reorder points with extensive data and AI-powered technology backing every decision. Request a demo to learn more.
Reorder Point vs. Safety Stock: Common Questions Answered
If you need to quickly navigate the similarities and differences between these two key calculations in inventory management, find fast answers to your most pressing questions about reorder points and safety stock below.
What is the difference between safety stock and reorder point?
Safety stock is a part of the equation for discovering the ideal reorder point. Reorder point, or ROP, is the number of remaining units at which a company should place another order to replace the products sold. Meanwhile, safety stock is the amount of excess inventory companies hold onto in case swings in demand or supplier issues suddenly change the reorder point. Both calculations help companies avoid overstock or stockouts.
What is the difference between MRP and reorder point?
MRP, which stands for material requirements planning, is an all-encompassing system for managing production, inventory, and product supply. An MRP system will help you identify which materials are needed at each step of the process, when, and in what quantities. When compared to the reorder point, MRP encompasses a much broader range of activities and many more stages of manufacturing and inventory processes. Reorder point is a more specific calculation aimed at finding the ideal point in time for replenishing products based on how often that product is sold and how long it takes suppliers to deliver new product shipments.
How does a safety stock requirement affect the reorder point?
Safety stock requirements are factored into the equation for finding the optimal reorder point for any product. The reorder point formula is: ROP = (average daily unit sales) x (lead time + safety stock).
